South Africa Takes A Hit But West Africa Is Fine

South Africa Takes A Hit But West Africa Is Fine

Gold mining is subject to concerns about future changes to legislation and rising costs.

South Africa’s gold miners struggled in 2012. The best performing company, DRDGold, stopped mining new ore and stuck to processing tailings – extracting small amounts of ore that remain in the dumped waste of previously processed ore.

The next best performing company was Gold Fields, whose shares lost 16.5%. The industrial unrest that affected the platinum industry also affected South Africa’s gold mines. Gold Fields sacked 8,100 staff at its KDC East mine in October before reinstating the majority of them 23 days later.
Gold Fields has since spun off its South African gold assets into a new company called Sibanye Gold, which will run the KDC and Beatrix mines which produced 688,000 oz in 2012 at an all in cost of $1,254 per oz.

Harmony Gold, whose shares fell 23% (as did AngloGold Ashanti’s despite their more geographically diverse production) is not far behind with production of 551,000 oz but at a higher all in cost of $1,467 per oz. The company’s Kusasalethu mine remains closed for the time being.

Rising energy costs, more modest prices, horrendous industrial relations and increasing uncertainty about possible adverse government changes to legislation have all weighed on the sector. Although the recent appointment of former firebrand turned Lonmin director, Cyril Ramaphosa as ANC deputy chair, has been welcomed by the industry.

Upward wage pressure is likely to continue from the largely disaffected workforce. Additionally, four thousand former gold mine workers who are suffering from lung diseases such as silicosis, tuberculosis and similar conditions have filed a law suit in the High Court of South Africa, seeking compensation from Anglogold Ashanti, Goldfields and Harmony Gold.

The South African industry’s woes also include a ‘resource rental tax’, a 50% tax that will apply to mining profits after they have made a ‘reasonable return.’

Gold prices did rise in 2012 but by much less than the forecast. Predictions of prices above $1,800 per oz or even $2,000 per oz proved overly optimistic due to weaker demand in India and China, the biggest buyers of gold, less upward price pressure than expected from the US Fed’s quantitative easing programme and more muted central bank purchasing.  The yellow metal has had a challenging start to the year as the Federal Open Market Committee’s (the body that set US interest rates and manages monetary policy) latest minutes suggested an increasing reluctance to continue intervening in markets by buying up assets. This potentially reduces liquidity and has pushed prices down.

The outlook for gold prices in 2013 is one of uncertainty and probably volatility. In the absence of a confirmed recovery amongst developed nations it is probably tending towards a bullish outlook, especially if China’s gold-hungry economy grows and the Indian rupee appreciates against the dollar, since the rupee’s weakness in dollar terms has restricted gold purchases there.

A PricewaterhouseCoopers report claims that 80% of mining executives expect the gold price to rise in 2013. In any event, prices remain comfortably above the costs of production for most producers.

Elsewhere on the continent gold miners were enjoying a rather better time than their South African peers. Newmont Mining had a challenging year in 2012 as production fell. However, the company’s African production has strong growth prospects over the short to medium term, principally because of the development of Akyem in Ghana. Progress at the Akyem project is going well and it is  approximately 65% complete and, so far, is on budget. Production is expected to commence in late 2013, and will increase over the course of the three to six months following commission.

Furthermore, Perseus Mining’s boss Mark Calderwood expressed his confidence that West Africa is a safe place for investors to do business, reportedly telling a conference in Australia that “I don’t know of a single case in West Africa where someone has lost a licence that didn’t deserve to do so.” Although he did go on to criticise Guinea and express concerns about what he called “tax creep”.

Calderwood pointed out that 21 gold mines have been commissioned since 2005 in west Africa, and that 17 are in development. Production in the region has risen from 6.7m oz in 2010, to a forecast 8.5m oz in 2013 (roughly equivalent to US output in 2011 and 10% more than South Africa’s that year) and 11m oz in 2015.

Around half the sub-region’s gold is produced by Ghana, 15% by Mali and Burkina Faso, 10% by Guinea and 5% by Côte d’Ivoire.

Perseus’  Edikan mine in Ghana produces some 260,000 oz per year. However, it is holding back on developing its Sissingue mine in Côte d’Ivoire, a proposed $115m investment, pending resolution of a proposed windfall tax. The mine is expected to be able to produce 170,000 oz per year.

The proposed tax will apply to profits made in excess of production costs of $615 per oz and is expected to generate $79.8m in additional tax revenue. The country’s miners largely dispute this threshold, saying costs are nearer $1,000 per oz.  

Ghana, the second-largest producer on the continent after South Africa, is widely regarded as an excellent and secure place to mine. Chinese-Ghanaian trade rose 70% in the first half of 2012, compared to the same period of 2011. Gold production in 2011 breached 100 tonnes, 30% of which comes from artisanal, or small-scale, mines.  

The world’s biggest gold miner, Barrick Gold, has just announced that a proposed $3bn sale of its 74% stake in spin-off company African Barrick Gold to China National Gold has fallen through. The takeover target’s shares fell 20% on the news of the collapse of what would have been one of the largest Chinese acquisitions yet. The company’s financial performance tailed off in 2012 and it seems no agreement on price was possible. As elsewhere, Chinese investors are increasingly canny in searching for value with their acquisitions and are not afraid walk away rather than pay over the odds for assets.

(Gold production is generally measured in ozs but the production of major producers (such as nations) is often aggregated into tonnes, each tonne being equivalent to 35,274 oz.)

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